• Ron Huber

How Legacy Banking Systems Pose a Threat to Digital Transformation and Stunt Growth



Most bankers (83%) recognize the importance of digital transformation, but only 43% of bank executives are committed to transforming their existing business models.

What prevents organizations from going all out? As a general rule, when the costs outweigh the benefits, a new idea or policy is unlikely to be adopted.

But what if the costs of holding on to legacy banking systems are far higher than most leaders think?

In this article, we highlight the obvious (and not so obvious) challenges that legacy banking systems pose to your digital transformation journey and organization in general, stifling growth, killing innovation, and hurting your bottom line.

Why Are Legacy Systems Still Used?

In a perfect world, banking institutions quickly adapt to the most recent technological advances, propelling their industry forward and bringing exponentially more value to the table.

But this is not a perfect world. In reality, many legacy systems that operate with billions of dollars on a daily basis have been running for over 30 years.

Even though legacy banking systems are outdated and no longer efficient, most banks continue to use them. There are several reasons for this:

  • Risk aversion - It’s estimated that over $3 trillion is being processed by outdated COBOL systems based on a 60-year-old programming language. When the stakes are that high, any process disruption or technical issue during or after software modernization can lead to disastrous consequences, incentivizing banks to maintain the status quo.

  • Customer inertia - Even though digital transformation offers a wide range of benefits, the reluctance to shop around has been an inseparable attribute of consumer banking behavior. Combined with high entry barriers for new companies, this removes competitive pressures and weakens innovation.

  • Resistance to Change - While undergoing digital transformation entails streamlining or eliminating processes, it brings the need to learn and adapt to new workflows. Change can be uncomfortable for employees and other key stakeholders, disincentivizing innovation.

  • The Cost of Digital Transformation - As a strategic initiative, digital transformation tremendously benefits organizations in the mid-and long term. Still, it entails substantial financial and operational upfront costs, which may detract banks from taking the leap.

While all of the reasons mentioned above may be valid to a certain extent, the “if it ain't broke, don't fix it” mentality can lead to significant negative consequences that may lead to the downfall of your organization in the future.

Let’s cover them in greater detail.

How Legacy Systems Undermine Banking Institutions

Banks must undergo a digital transformation in order to stay relevant in the ever-changing digital world.

The problems associated with legacy banking systems include incompatibilities with modern third-party systems, high maintenance costs, and frequent upgrades and patches due to outdated systems and security loopholes.

While this seems obvious, the problem is much more complex than most banks think. Below, we explore how legacy systems can undermine the growth of your organization, making it increasingly less competitive and effective.

Slow Performance and Transaction Processing Times

Legacy systems are slow and inefficient, which can be very frustrating for the customers and employees alike.

If customers experience long wait times when navigating your digital ecosystem, they are likely to push through their customer inertia and start exploring other options.

Bad system performance also negatively impacts workplace morale since it can directly interfere with your teams’ workflows, leading to poor employee experience and even higher turnover rates. In fact, 24% of employees considered leaving their organization due to mismatched software.

The loss of productivity, revenue, and, eventually, market share are all the byproducts of inefficient banking systems.

Financial institutions must invest in digital transformation to drastically improve performance across the board without sacrificing the quality of service provided to their customers to prevent that from ever happening.

The Cost of Constant Patching, Maintenance, & Upgrades

One of the main challenges of relying on legacy systems in banks is the high maintenance costs, putting an enormous strain on your IT infrastructure and human resources.

The cost of maintaining old systems quickly adds up the longer you delay digital transformation. There are endless security patches that must be implemented to ensure that some of the most common cybersecurity vulnerabilities do not lead to data breaches, as well as constant updates to keep your software compatible with third-party solutions.

The older the system is, the harder it will be for managers to find qualified candidates with the skills needed to handle your IT infrastructure.

Newer employees are unfamiliar with these old systems and will have to go through a steep learning curve to get up to speed.

Digital transformation can successfully open up new business opportunities, keeping expenses down while allowing banks to take advantage of the latest technologies.

Poor Scalability

You’re almost guaranteed to face scalability issues when working with legacy systems.

Most legacy banking systems were built in the 70s and 80s and were not built to quickly handle the exponentially growing data exchanges and transactions.

This challenge is compounded by the dominance of mainframes in banks’ IT landscape.

Mainframes are difficult to integrate with next-generation technologies, limiting how banks can develop new solutions on top of them. Meanwhile, most legacy systems cannot automatically convert data into a machine-readable form, which is essential for machine learning operations.

Although there has been some improvement in recent years, fragmented data architectures across banking legacy systems still present significant barriers to digital transformation strategies aiming to deliver better customer experiences.

The resistance to change opens up potential opportunities for new competitors to enter the market with more effective solutions than traditional brick-and-mortar institutions can provide.

Fragmented Data Architectures

Bank systems' initial design and architecture date back to the 1970s and 1980s.

By the 1990s, many banks had adopted the client-server model which further entrenched silos due to a lack of integration between front-end and back-end systems.

As a result, most banks’ system landscape today comprises disparate technologies that do not integrate well with each other.

Some older platforms use File Transfer Protocol (FTP) to move data from front-end servers to middleware platforms, while modern systems use web services.

The dominance of mainframes in banking legacy systems has led to various challenges around integration, most notably the fragmentation of data architectures across front-end and back-end IT infrastructure.

These architectures are often developed independently, leading to inconsistencies throughout the system landscape.

With new technologies being introduced almost every day, this problem is exacerbated by outdated platforms that are fragmented with modern ones.

This environment makes it difficult for banks to integrate their entire systems into a coherent view.

The lack of an integrated approach can result in inaccuracies in customer information due to discrepancies between legacy systems and loss of customer conversion opportunities, hindering analytics and reporting capabilities that banks rely on to make strategic decisions and innovations.

Although there has been some improvement in recent years, fragmented data architectures across banking legacy systems still present significant barriers to digital transformation.

Ineffective Security Controls

Banking legacy systems are plagued with vulnerabilities that hackers can easily exploit.

As we've seen in the news, these weaknesses can lead to the theft of millions of customer records containing highly sensitive data.

The financial industry has been subject to several high-profile data breaches. In 2017, tens of millions of households were affected by a security breach at Equifax, a credit reporting agency, compromising 147 million consumers.

These types of large-scale data breaches can result in a devastating blow to an organization’s reputation - loss of customer trust, and a barrage of lawsuits - which combines result in millions of dollars lost.

Banking legacy systems are becoming an easily exploitable weakness in the financial sector. Banks need to upgrade their legacy systems with modern security controls to stay competitive, protect customer data, and ensure overall bank security.

The Inability to Meet Modern Customer Needs

Perhaps the biggest challenge with legacy systems is their inability to meet the needs of modern customers. Today's consumers are mobile, social, and always on the go - and they expect their banking experience to reflect that.

But legacy systems are often outdated and challenging to use on mobile devices. They also don't offer the modern features that consumers now expect.

Legacy banking systems aren't just limited by modern technology - they also add an unnecessary layer of complexity to the business process.

Whether it's the overly complex multi-channel experience or simply an outdated interface, banks must adapt to modern consumers or risk losing them to the competition that doubled down on innovation.

Lead the Banking Industry with Achieve

Digital transformation is critical for the banking industry to remain competitive and meet the needs of its customers in a digital world. There are, however, many banks struggling with legacy systems that make this process significantly more difficult.

By understanding these obstacles and taking steps to overcome them, banks can make strides toward becoming more digitally-focused organizations.

Our solutions can handle both REST and SOAP, allowing you to deploy an API portal long before you've transformed your entire infrastructure.

Achieve Internet is here to help you accelerate your digital transformation through an end-to-end API portal solution that helps you centralize all of your APIs in one place, making them more effective, accessible, and secure.

Get in touch with our team today for a free consultation.